Moving produce in India and what that means for Wal-Mart

In the world of perishable goods perishing, India has few rivals. Lacking proper storage facilities, enough refrigerated trucks and adequate highways, the world’s second-largest fruit-and-vegetable producer loses about one-third of its produce each year to spoilage, the government says, roughly $10 billion worth.

India also is bogged down by an entrenched system of government-imposed middlemen, the scope of which has few parallels, essentially an army of traders and agents who charge various fees along the way. That alone can increase farm-to-store costs sixfold, analysts estimate.

Just what does this system look like? The video below (which regrettably you have to go off the Ops Room to see) gives you an idea:

Obvious a contorted supply chain like this doesn’t arise over night, so why is the Journal writing about it now? In a word, Wal-Mart!

Last fall, following a relaxation in India’s foreign-investment rules, [Wal-Mart] said it was planning to open its first stores in the country in the next two years, tapping into a prized $490 billion retail sector. But to cash in, Wal-Mart and other foreign retailers will have to solve a fundamental problem: how to move goods into stores efficiently in a country that offers big retailers little in the way of modern logistics and is plagued by dilapidated infrastructure.

The hurdles are particularly daunting in the food sector, which makes up more than half of the revenues at the Bentonville, Ark.- based company.

How will Wal-Mart take on this challenge?

In the face of all this, analysts say, it is unlikely Wal-Mart will try to replicate its U.S. supply operations, which are focused primarily around massive distribution centers supporting up to 100 stores. Raj Jain, president of Wal-Mart’s India unit and chief executive of its local joint venture with Bharti Enterprises Ltd., says the company has gotten a head start by opening wholesale businesses. The venture, which has opened 20 outlets since 2009, has given Wal-Mart experience linking up with farmers in some parts of the country, as well as dealing with decrepit roads and storage facilities.

Mr. Jain says the company has signed up 7,000 farmers, and plans to reach 35,000 by 2015. He is critical of the middlemen system that would impede large-scale expansion. Farmers “have to go to a set of brokers who essentially have a cartel—they have no option or choice,” he says. The answer, he says, is for state governments to relax their rules. “If we want to become big one day, then reforms would be required,” Mr. Jain says. …

Wal-Mart has built up expertise in other markets that could prove valuable in India. In Central America, Wal-Mart’s Mr. Jain says, the company got experience procuring food from small landowners and upgrading an outdated supply chain. In China, Wal-Mart had to deal with regional restrictions on where it could set up stores for several years. In Brazil, the company’s successful “Todo Dia” outlets are examples of small stores targeting low-income consumers.

So Wal-Mart has experience in dealing with smaller suppliers in China and, indeed, has some experience in sourcing produce locally in the US. Still it is hard to imagine there is a way to quick success in India. There seem to be many parties with a vested interest in keeping the system as it is. That surely will limit its ability to grow rapidly. The question is whether they can get to some reasonable scale in one or two regions and leverage that to get some modernization of the food distribution system.

Wal- Mart is the world’s largest corporation and it is one among the biggest private employer of America. The potential effects of FDI in retail include an increase in imports, price pressure on Indian producers.